We’ve seen a meaningful divergence on display in the stock market this month as the global bond selloff has pushed yields sharply higher.
In the past couple of weeks, we’ve discussed the drivers behind rising bond yields, and now they’re causing a division among stocks this month. In the chart below, we see dividend-paying stocks (green) getting hammered (down over 4.5%) as more attractive bond yields will inevitably draw some income-seeking investors from dividend stocks to bonds. Speaking of bonds (red), they’re down over 2.5% this month as higher yields make almost all existing bonds worth less.
But here’s the big split. The standard S&P 500 index (blue) remains up almost 1% this month, while the Dow (light blue) and the equal-weight S&P 500 (pink) are both down over 2.5%.
This is because the standard S&P 500 index gives more weight to larger companies. This is often referred to as the cap-weighted S&P 500, short for capitalization-weighted. Currently, the 10 largest companies are now almost 40% of the value of the S&P 500 and accounted for 34% of the profits as of May.
https://www.slickcharts.com/sp500
“The S&P 500 is not a diversified index anymore; it is dominated by a small number of extraordinarily profitable tech companies.”
Alternatively, the Dow is not cap-weighted. Instead, it uses an antiquated methodology I won’t go into here, but it results in just a 17% technology weighting.
Finally, the equal-weight S&P 500 does just what it says – it weights all companies in the S&P 500 equally, about 0.2% each. This gives the largest 10 companies a weighting of 2% as opposed to nearly 40% in the standard S&P 500, and an overall technology weighting of about 17%, like the Dow.
Despite concerns pushing most stocks lower this month, investors have unsurprisingly been reluctant to sell the 10 stocks responsible for the most concentrated market in history.
Have a great weekend.
Jack C. Harmon II, CFP®, CIMA
Principal, Harmon Financial Advisors
Registered Principal, Raymond James Financial Services
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